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July 21, 2006
Filing Resolutions at Mutual Funds: The Next Frontier for Shareowner Activism?
    by Bill Baue

Eight years after the Northwest Corporate Accountability Project first filed an environmental shareowner resolution, it will finally go to vote at the Merrill Lynch Global Allocation Fund.

It has been a long time coming for David Ortman, executive director of the Northwest Corporate Accountability Project, but the shareholder resolution he first filed in 1998 at the Merrill Lynch Global Allocation Fund (ticker: MDLOX) is finally on the proxy and going to vote August 15. The resolution asks the fund to divest from Freeport McMoRan (FCX) due to concerns over environmental damage due to discharge of tailings from its Grasberg mine into the Irian Jaya rivers in Indonesia. While resolution-filing on environmental, social, and governance (ESG) issues at companies is commonplace, the tactic is very rarely used at mutual funds.

"Unlike companies, which must have annual meetings, mutual funds are only required to have shareholder meeting when making major changes, so you never know when your resolution may appear," Mr. Ortman told "Still, I think filing resolutions at funds is a viable tactic as another front for addressing social and environmental issues."

Michelle Chan-Fishel, program manager for the green investments project at Friends of the Earth (FoE) and shareowner activism coordinator, agrees.

"Filing shareholder resolutions may prove to be an interesting way to mainstream responsible investment practices into traditional mutual funds," Ms. Chan-Fishel told "Such resolutions may not win majority votes, but they could focus funds' attention on issues such as better fund governance or enhanced engagement with investee companies, allowing funds to make improvements while staying true to what they promised shareholders in the prospectus."

Mr. Ortman started out on the primary front, filing resolutions directly with Freeport through the Seattle Mennonite Church.

"Freeport investors were, shall we say, disinterested in the environmental and social aspects of what their corporation was doing because they invest to profit from gold mining," he explained. "We were getting low-percentage votes, so we decided to branch out."

In addition to filing at the Merrill Lynch fund, Mr. Ortman's wife filed the same Freeport divestment resolution at TIAA-CREF, which earned 17 percent support from participants in 1999.

"The trouble is, the next year TIAA-CREF went to the SEC and had their lawyers fight bitterly, arguing that you could not ask a mutual fund to divest of a specific company, because of the 'ordinary business' rule preventing micromanagement, and the SEC issued a no-action letter allowing TIAA-CREF to leave the resolution off their proxy," Mr. Ortman explained.

Meanwhile, Merrill Lynch issued a proxy in June 2000 with no mention of the resolution. Merrill told Mr. Ortman it no longer held Freeport stock, but their April 2000 semi-annual report said otherwise--while it no longer held Freeport common stock, it retained preferred stock. Merrill settled an "Understanding and Agreement" with Mr. Ortman to divest from the preferred shares if they hit a target price by 2002, which didn't happen, and so a provision called for including the resolution on the next proxy. In the absence of this settlement, Merrill probably could have successfully petitioned the SEC for a "no-action" letter allowing it to omit the proposal from its proxy, based on the TIAA-CREF "ordinary business" precedent.

The proxy does not include a rebuttal statement from Merrill, though it does ask shareholders to vote against the resolution. Merrill spokesperson Jessica Oppenheim did not respond to's request for an explanation why Merrill recommends opposing the resolution.

"I'm not aware of anybody else who is doing this, but I do know of many efforts to get mutual funds to be more active," said Mr. Ortman.

For example, a recent study by Ceres reveals that Vanguard, Fidelity, and American Funds did not support a single climate change resolution in 2005.

"Now that mutual funds have to publish their proxy voting policies and votes, shareholders could advocate for the creation of thoughtful proxy voting policies that address environmental and social issues," Ms. Chan-Fishel of FoE points out.

Mercer Bullard, founding president of Fund Democracy, a nonprofit that advocates for mutual fund shareholder rights, sees resolution-filing at mutual funds as a potentially effective strategy to enhance corporate democracy.

"Getting fund shareholders to vote on a particular company or issue sure looks like a pretty good way to put a bull's eye on the forehead of that company in the eyes of the public," Mr. Bullard told, "and even more so with an issue because then the legitimacy of seeking to change the fund's strategy is stronger than if you're targeting a particular company."

Mr. Bullard, an assistant professor at the University of Mississippi School of Law and former assistant chief counsel in the SEC's Division of Investment Management, draws an analogy to the argument against the "Wall Street walk." Conventional wisdom used to hold that shareholders with qualms about the environmental, social, or governance practices of a company should "vote with their feet" by selling the stock. However, institutional investors now hold such large tracts of shares across entire markets as to preclude divestment as an economical option and favor shareowner engagement advocating for change at portfolio companies.

"Take Nike for example--it's the biggest shoemaker in the world, so if we're going to improve factory conditions in Asia, our only option is to engage with Nike," said Mr. Bullard. "Similarly, the argument would go, if we are going to ensure capital is allocated in socially conscious ways, our only option is to engage with Vanguard and Fidelity."


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